A lot of people often wonder how to create a budget that also includes taxes, particularly for those who work as freelancers or as business owners.
How to Create a Budget Plan for Your Taxes
Step 1: Start with Filling Out the Tax Forms
People who have a fixed salary can easily fill out their tax budgeting. The form 1040-ES is very simple and straightforward. If you receive bonuses, simply add those numbers. Generally, the tax rate schedule is on page 7.
If you are making a budget for your taxes in advance, use the figures provided and then deduct your taxes against your expected yearly earnings.
For those who want to go the extra mile, you can send your taxes quarterly in advance. No need to worry if you overpay, since you can opt to receive the tax refund via direct deposit or mail. In fact, you can use your tax refunds as additional investments.
Do note that if you have a second job or a side hustle, an accurate projection can be difficult. That is why taxpayers should know how to estimate tax payments.
Tip: It is better to err on the side of caution, so round up your taxes in favor of paying more rather than less. The IRS can be quick to give out penalties and delays.
Step 2: Compare Your Tax Return with the Previous Year
Unless you have earned a substantial raise, you will most likely have the same deductions and tax rates. Using the previous year as a benchmark can make your planning even faster since you can just pattern how much you can spend for the year.
An interesting rule is found in the underpayment of estimated tax. If you paid the same tax of the previous year and upon review you are underpaid, you will not get a penalty according to the IRS guidelines. So if you make a monthly or quarterly tax payment, you can still pay the same rates from the previous year. However, it is always prudent to err on the side of overpayment.
Tip: For those with an annual income that may be volatile, like a business owner or freelancer, the federal government will only ask for estimated payments.
Freelancers and the self-employed must pay their taxes by themselves. Due to the nature of their work, people who do not have a fixed salary may forget when to file and pay taxes.
Remember these four important dates:
- April 15
- June 15
- September 15
- January 15
Of course, if the 15 is a weekend or a holiday, the next business day should be marked instead. These are the dates when you need to have paid your quarterly taxes.
Remember, like you, the IRS errs on the side of receiving taxes earlier rather than later. They can, and will, charge penalties if you do not pay your taxes on time. You can always pay more on the next tax payment deadline to catch up. The quarterly payment might seem inconvenient but is actually very practical.
Step 3: Learn How to Set Aside Money for Taxes
There are two ways to earn money. The first one is increasing cash flow or revenue. The second one is saving what was made. Doing both, earning more and saving more, can help not just your taxes but also your quality of life.
Setting aside some hard-earned money can be difficult to do. Setting up an automatic deposit to a separate account for taxes when receiving income can do wonders for planning ahead.
Caveat: It is better to overpay than underpay. If you are in doubt of your understanding regarding tax laws, either consult an accountant or pay in excess. Penalties can be nasty to both your wallet and your record.
Tip: For freelancers who work on big work projects, it is a good idea to pay the taxes after getting paid.
Step 4: Study How to Create a Budget Electronically for Your Convenience
Technology has made life a lot easier. A lot of smart apps, both mobile and on a PC, can help taxpayers straighten out their records.
For mobile users, there is the TurboTax Mobile or the Credit Karma Tax App. For PC users, there are a lot of virtual accountant options like TaxAct and QuickBooks. Here you can manage your bills, create invoices, and even pay workers and contractors.
It works like Microsoft Word and Excel but with the interface of an app. Using Microsoft Excel as your personal spreadsheet is fine. However, QuickBooks and other online tax apps provide you with the ability to pay bills automatically as well as see the records where your eyes don’t start hurting from squinting.
Tip: For more information about online tax preparation and payments, research more on online tax preparation.
Step 5: Manage Your Finances and Set Aside Money for Taxes
A good rule of thumb is to set aside 30% of your income. The Wall Street Journal once stated that 30% is the sweet spot for tax withholding. For instance, if you have four big projects for the year, you can pay your estimated tax by setting aside the revenue of a project for taxes.
As noted previously, you can underpay if you send tax payments equal to the previous year. Take a look at Form 2210 so that you can plan ahead.
Caveat: For those who earn more than $150,000, it is much safer to pay 110% of the previous tax payments. Underpayment, also known as the safe harbor rule, is made to protect those who have difficulty getting their tax preparations in order.
Step 6: Freelancers and Self-Employed Individuals Should Find Out How Much Money to Set Aside for Taxes
For freelancers and those who are self-employed, 35 to 40% is ideal. Those numbers may look huge. However, freelancers have a lot of taxes to pay compared to the salaried workers. There are sales tax if your profession entails selling merchandise. There is a franchise tax that may be different from state to state. There are millage or property taxes for those who own an office and also an excise tax.
By setting aside 40%, freelancers can rest easy knowing that they are fully covered regarding taxes.
Tip: If you want to save more, try to incorporate tax deductibles in your budget. It is better to prepare now than wait for tax season to do the paperwork.
By setting aside time and money for your taxes, you can save future headaches. 30% is a safe tax rate for most. Make your life easier by using online tax applications. Remember, without taxes, a nation cannot perform necessary services. An overpayment is preferable to underpayment, as penalties and a stained record can affect your standing.
Have you started your tax preparation? Do you have any additional tips you want to share? Let us discuss in the comments section below.
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